in Re Stephenson Family Trust

If this opinion indicates that it is “FOR PUBLICATION,” it is subject to

revision until final publication in the Michigan Appeals Reports.

STATE OF MICHIGAN

COURT OF APPEALS

In re ESTATE OF VERNON STEPHENSON.

CHRISTINA SMITH, G. SCOTT SMITH, and UNPUBLISHED

STEPHEN SMITH, July 30, 2020

Appellees/Cross-Appellants,

v No. 348207

Genesee Probate Court

RANDAL STEPHENSON, Personal Representative LC No. 15-202160-DE

of the ESTATE OF VERNON STEPHENSON,

Appellant/Cross-Appellee.

In re STEPHENSON FAMILY TRUST.

CHRISTINA SMITH, G. SCOTT SMITH, and

STEPHEN SMITH,

Appellees/Cross-Appellants,

v No. 348210

Genesee Probate Court

RANDAL STEPHENSON, Successor Trustee of the LC No. 17-208550-TV

STEPHENSON FAMILY TRUST,

Appellant/Cross-Appellee.

Before: METER, P.J., and BECKERING and O’BRIEN, JJ.

PER CURIAM.

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In these consolidated cases,1 respondent, Randall Stephenson, appeals by right the probate

court’s order granting partial summary disposition to petitioners, Christina Smith, G. Scott Smith,

and Stephen Smith. In a cross-appeal, petitioners appeal the probate court’s holding that

respondent was authorized under the terms of the Stephenson Family Revocable Living Trust (the

Trust) and/or the durable power of attorney for Vernon Stephenson to make limited gifts and

disbursements to himself and his children. This appeal has been decided without oral argument

pursuant to MCR 7.214(E). We affirm in part and reverse in part.

I. PERTINENT FACTS AND PROCEDURAL HISTORY

Respondent and Christina are siblings, and Scott and Stephen are Christina’s children.

Vernon and Kathleen Stephenson (together, the decedents) were respondent and Christina’s

parents. Respondent’s children are Gabriella and Miles Stephenson. In 2010, the decedents

created the Trust and dual durable powers of attorney in which each spouse nominated the other

to serve as primary attorney-in-fact with respondent to serve as the first alternate. The Trust

designated the decedents to be primary trustees and beneficiaries, with respondent to serve as

successor trustee upon the decedents’ incapacitation or death. Respondent, his children, and

petitioners were other named beneficiaries.

Kathleen died on March 6, 2014. On March 14 and 25, 2014, two doctors declared Vernon

to be incompetent and unable to perform his trustee duties. Respondent accordingly assumed his

role as both successor trustee and the holder of Vernon’s power of attorney. Vernon died on April

6, 2015. After Vernon’s declared incompetency in March 2014, respondent made substantial

distributions from the Trust and Vernon’s estate amounting to approximately $147,000 to pay his

children’s educational expenses and $56,000 to himself.2 A later accounting of the Trust’s assets

showed that after these distributions, approximately $700 remained.

Petitioners brought this action alleging that respondent violated his fiduciary duties and the

Trust’s terms by improperly self-dealing and exhausting the Trust’s assets to their detriment as

beneficiaries. Petitioners also contended that respondent failed to include in the Trust’s assets a

“Demand Promissory Note” (the Note) that was created in 2009 and in which respondent and his

wife agreed to repay with interest a $120,000 loan from the decedents. The Note provided that the

entire amount was repayable upon the decedents’ demand at any time.3

Respondent defended his actions under the Trust’s and power of attorney’s terms,

maintaining that he was given unbridled discretion to distribute the Trust’s assets and that

1

In re Stephenson Estate, unpublished order of the Court of Appeals, entered April 3, 2019

(Docket No. 348207); In re Stephenson Family Trust, unpublished order of the Court of Appeals,

entered April 3, 2019 (Docket No. 348210).

2

The probate court never determined the source of these payments, meaning it is unknown whether

they were drawn from the Trust or Vernon’s separate assets.

3

Petitioners raised other claims in the probate court, but those claims were not the subject of the

motion for partial summary disposition and are therefore not discussed in this appeal.

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petitioners had no right to a distribution. He also contended that the Note was forgiven by Kathleen

and therefore was not an asset of the Trust or Vernon’s estate.

Both parties moved for partial summary disposition, and the probate court granted partial

summary disposition in petitioners’ favor. The probate court held that respondent was authorized

under the power of attorney and the Trust to make distributions to himself and his children, but his

authority to do so was limited to gifts “that will qualify for exclusion under the Internal Revenue

Code.” It further held that the Note had not been discharged.

Both parties appeal. Respondent challenges both of the probate court’s determinations,

while petitioners challenge the probate court’s ruling that respondent had authority to make gifts

or disbursements under the power of attorney and the Trust, contending that respondent had no

authority to make any disbursements or gifts, however limited, to himself or his children.

II. ANALYSIS

A. STANDARDS OF REVIEW

A motion is properly granted pursuant to MCR 2.116(C)(10) when “there is no genuine

issue with respect to any material fact and the moving party is entitled to judgment as a matter of

law.” Dextrom v Wexford Co, 287 Mich App 406, 415; 789 NW2d 211 (2010). This Court “must

examine the documentary evidence presented and, drawing all reasonable inferences in favor of

the nonmoving party, determine whether a genuine issue of material fact exists. A question of fact

exists when reasonable minds could differ as to the conclusions to be drawn from the evidence.”

Id. at 415-416.

This Court reviews de novo both the probate court’s interpretation of a trust, In re Theodora

Nickels Herbert Trust, 303 Mich App 456, 458; 844 NW2d 163 (2013), and its interpretation of a

contract, Rory v Continental Ins Co, 473 Mich 457, 464; 703 NW2d 23 (2005).

B. POWER TO MAKE GIFTS

We reject petitioners’ argument that respondent was prohibited from making gifts to

himself or his children under Vernon’s power of attorney or the Trust.

First addressing respondent’s authority under Vernon’s power of attorney, it is well

established that “[a] power of attorney provides the agent with all the rights and responsibilities of

the principal as outlined in the agreement.” In re Capuzzi Estate, 470 Mich 399, 402; 684 NW2d

677 (2004). A power of attorney must be “strictly construed and cannot be enlarged by

construction.” Park v Appeal Bd of Mich Employment Security Comm, 355 Mich 103, 135; 94

NW2d 407 (1959).

Vernon’s power of attorney contains a gift-giving provision empowering the attorney-in-

fact to “make gifts to third parties or to the agent(s) as individual(s), as the agent(s), in the sole

discretion of the agent, deem appropriate, provided said gifts qualify for the annual exclusion under

Sections 2503(b), 2503(c) or 2503(e) of the Internal Revenue Code of 1986, including amendments

thereto.” This power of attorney clearly gave respondent, as the attorney-in-fact, the authority to

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make limited gifts, including limited gifts to himself. Petitioners do not dispute this. Instead, they

contend that Michigan law nonetheless prohibited respondent from self-dealing.

Petitioners argue that the outcome of this case should be controlled by In re Cummin Estate,

258 Mich App 402; 671 NW2d 165 (2003), or In re Cummin Estate, 474 Mich 1117; 712 NW2d

447 (2006), but neither case compels us to conclude that respondent did not have the authority

under Vernon’s power of attorney to make gifts to himself or his children. Unlike the case before

us, the power of attorney in Cummin did not explicitly allow the attorney-in-fact to self-deal, so

the courts relied on the common-law rule that an agent may engage in self-dealing if the principal

consents and has knowledge of the details of the transaction. See In re Cummin Estate, 258 Mich

App at 409; In re Cummin Estate, 474 Mich at 1117. The power of attorney in the present case

explicitly empowered respondent to self-deal in the gift-giving provision. This provision must be

strictly construed and cannot be expanded or limited. Park, 355 Mich at 135. Accordingly,

respondent had the authority under the power of attorney to make limited gifts, including gifts to

himself.

Turning to the Trust, we conclude that the terms of the Trust gave respondent the authority

to make disbursements and limited gifts to himself and his children. The goal in a trust’s

interpretation is to “ascertain and abide by the intent of the settlor,” and a court does this by looking

to the trust’s language. In re Miller Osborne Perry Trust, 299 Mich App 525, 530; 831 NW2d

251 (2013). The same rules of construction that apply to the terms of a will also apply when

appropriate to the terms of a trust, MCL 700.7112, so a trust must be read in its entirety and, if

possible, with harmony among its provisions, In re Raymond Estate, 483 Mich 48, 52; 764 NW2d

1 (2009).

Article Four, Section D of the Trust states:

D. INCAPACITY OF THE SURVIVING TRUSTMAKER OR BOTH

TRUSTMAKER(S):

If the surviving Trustmaker or both of us are replaced as trustee(s) of this

trust as provided above, the successor trustee(s) shall use the trust estate for our

benefit and for the benefit of anyone else authorized by Article One or Two of this

living trust. Any income not paid to or for our benefit or to or for the benefit of

other authorized beneficiaries shall be added to the principal.

The foregoing shall also apply to distributions by the trustee(s) whenever

the surviving Trustmaker or both of us who are not serving as trustee(s) become

incapacitated.

The statement “anyone else authorized by Article One or Two” is a reference to any of the

beneficiaries of the Trust. Thus, this provision clearly authorized respondent, as successor trustee,

to make distributions from the Trust’s assets for his benefit or the benefit of his children, all of

whom are beneficiaries of the Trust.

Article Four, Section G of the Trust provides:

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G. GIFTING AND LOANS:

If the surviving Trustmaker or both of us are replaced as trustee(s) of this

trust as provided above, the successor trustee(s) shall be fully authorized to make

gifts from this trust to third parties or to the successor trustee(s) as individual(s) as

determined in the sole discretion of the successor trustee(s), provided said gifts

qualify for the annual exclusion under Sections 2503(b), 2503(c) and 2503(e) of the

Internal Revenue Code of 1986, as subsequently amended.

Additionally, if the Trustmakers keep a record of specific loans to

beneficiaries made during the Trustmakers’ lifetimes, and desire that said loans be

considered advances against inheritance, the Trustmakers will attach a list so

stating, and hereby direct the successor trustee(s) to deduct the loan amounts from

each respective share that the named beneficiary would have received. Further,

Trustmakers hereby forgive any loans that exceed any beneficiary’s share of trust

proceeds.

This section clearly authorized respondent, as successor trustee, to make gifts to himself and third

parties, like his children.4 But like the gift-giving authority under the power of attorney,

respondent could only give limited gifts under Article Four, Section G of the Trust.

Petitioners do not appear to contest that Article Four, Sections D and G, standing alone,

grant respondent the authority to make disbursements and gifts. Instead, they argue that when

these sections are read in conjunction with other provisions in the Trust, Article Four, Sections D

and G become ambiguous, and the court must look to extrinsic evidence to determine their

meanings. We disagree.

In support of their argument, petitioners first point to Article One, Section C’s instruction

that “[e]xcept as otherwise specified within the provisions of this Declaration of Trust, in the event

of the incompetency of both of us or the survivor of us, our successor trustee is to use the income

and assets of this trust exclusively for the health, education, support, and maintenance of both of

us or the survivor of us.” This provision does not create an ambiguity when read in conjunction

with Article Four, Sections D and G because it explicitly states that it applies except as otherwise

provided elsewhere in the Trust.

Petitioner’s next argue that Article One, Section J creates an ambiguity when read in

combination with Article Four, Sections D and G. Article One, Section J states that the decedents

“will have the exclusive right to the use and benefit of the income and assets of this trust” as long

as they are alive. While it is a closer question of whether Article One, Section J creates an

ambiguity in the Trust, we conclude that it does not. Petitioner is contending that Article One,

Section J creates a patent ambiguity, which “exists if an uncertainty concerning the meaning

appears on the face of the instrument and arises from the use of defective, obscure, or insensible

4

We note that Article Four, Section D addressed using the Trust for the beneficiaries’ benefit,

whereas Article Four, Section G addressed limited gifts to the successor trustee and third parties

regardless of the benefit, which allows these provisions to be read harmoniously with each other.

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language.” In re Woodworth Trust, 196 Mich App 326, 328; 492 NW2d 818 (1992). Article Four,

Sections D and G are clearly intended to apply in the event that the Trustees become incapacitated.

There is nothing “defective, obscure, or insensible” about the language used in those provisions.

Id. Likewise, there is nothing “defective, obscure, or insensible” about the language used in Article

One, Section J, id., and that provision is clear that the Trust is created for the use and benefit of

the Trustees (the decedents) as long as they are alive. Though Article One, Section J of the Trust

does not state an exception to its terms if the Trustees become incapacitated, we must read the trust

as a whole and, if possible, harmonize the provisions to reflect the intent of the decedents. See In

re Estate of Raymond, 483 Mich at 52. When reading the Trust as a whole, it is clear that the

decedents’ intent was for them to retain exclusive control except in the event that they became

incapacitated. We therefore conclude that there is no patent ambiguity in the Trust.

C. DISCRETIONARY TRUST

Turning to respondent’s appeal, we agree that the probate court erred by determining that

his power to make distributions under Article Four, Section D was limited by his ability to make

gifts under Article Four, Section G. However, we do not agree that respondent’s discretion was

unfettered—Michigan law places limitations and safeguards on a trustee-beneficiary’s handling of

a trust. There are factual determinations that prevent us from definitively ruling on this issue, so

we remand for the probate court to make the required findings to ultimately resolve the issues.

“Under a discretionary trust, the trustee may pay to the beneficiary as much of the income

or principal as the trustee in his discretion determines to be appropriate.” In re Johannes Trust,

191 Mich App 514, 517; 479 NW2d 25 (1991). But that discretion is not unlimited. While the

terms of a trust generally control over a statute, the terms of the trust do not prevail over “the duty

of a trustee to administer a trust in accordance with section 7801.” MCL 700.7105(2)(b). 5 That

section states that “the trustee shall administer the trust in good faith, expeditiously, in accordance

with its terms and purposes, for the benefit of the trust beneficiaries, and in accordance with this

article.” MCL 700.7801. Besides these restrictions, the exercise of any power by a trustee,

whether conferred on the trustee by statute or by the terms of the trust, is subject to the fiduciary

duties prescribed in the Michigan Trust Code, MCL 700.7101 et seq. MCL 700.7816(2).

Further, MCL 700.7815 addresses discretionary trusts, and it provides in relevant part:

(1) A beneficiary of a discretionary trust provision as described in [MCL

700.75056] has no property right in a trust interest that is subject to a discretionary

trust provision, and has no right to any amount of trust income or principal that may

be distributed only in the exercise of the trustee’s discretion. However, except as

provided in subsection (2) and notwithstanding the breadth of discretion granted to

a trustee in the terms of the trust, including the use of such terms as “absolute”,

5

By its terms, this statutory provision does not apply “as otherwise provided in [MCL 700.7703a]

and [MCL 700.7703b],” MCL 700.7105(2)(b), but those sections do not apply to this case.

6

MCL 700.7505 does not apply to this case.

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“sole”, or “uncontrolled”, a trustee abuses the trustee’s discretion in exercising or

failing to exercise a discretionary power if the trustee does any of the following:

(a) Acts dishonestly.

(b) Acts with an improper motive, even though not a dishonest motive.

(c) Fails to exercise the trustee’s judgment in accordance with the terms and

purposes of the trust.

* * *

(3) Subject to subsection (5),[7] the following rules apply to a trustee’s

exercise of a power unless the terms of the trust expressly indicate that the rule

does not apply:

(a) A person other than a settlor who is a trust beneficiary and trustee of a

trust that confers on the trustee a power to make distributions pursuant to a

discretionary trust provision to or for the trustee’s benefit may exercise the power

only in accordance with an ascertainable standard. [MCL 700.7815(1)-(3)

(emphasis added).]

MCL 700.7103(b) defines an ascertainable standard to be “a standard relating to an individual’s

health, education, support, or maintenance within the meaning of section 2041(b)(1)(A) or

2514(c)(1) of the internal revenue code of 1986, 26 USC 2041 and 2514.”

Respondent contends that he had unbridled discretion to distribute the Trust assets

according to the Trust’s plain, unambiguous terms. While we agree that that Article Four, Section

D unambiguously empowers respondent to distribute the Trust’s assets for the beneficiaries’

benefit within his discretion, we disagree that this discretion is unfettered and without limitation.

Michigan law clearly places restrictions upon a trustee exercising his or her judgment under a

discretionary trust, especially in circumstances in which the trustee is also a beneficiary. See MCL

700.7815. The probate court, however, erred by determining that the gift-giving provision of

Article Four, Section G controlled over Article Four, Section D. Article Four, Section G, by its

terms, applied only to gifts made to respondent or third parties, whereas Article Four, Section D

permitted respondent to use his discretion when distributing Trust assets for the benefit of the

beneficiaries, which included himself and his children.8

On the basis of the record before us, we are unable to determine whether respondent’s

exercise of his discretion as permitted by the terms of the Trust violated Michigan law. The parties

dispute numerous facts that have not yet been decided, including whether the decedents instructed

7

Subsection (5) is not applicable.

8

For clarity, we note that the restrictions under Michigan law on respondent’s discretion as

successor trustee apply to both his discretion to make distributions under Article Four, Section D

and his discretion to make gifts under Article Four, Section G.

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respondent to use the Trust money to pay for his children’s education. Relatedly, the parties have

evidentiary concerns regarding whether such evidence is admissible. The trial court needs to

address and resolve these issues before this Court can address them in an appeal.

Moreover, the source of respondent’s payments to himself and to his children is unknown

because the probate court declined to make this determination at this point in the proceedings. It

is not known, therefore, if the payments were taken from Vernon’s separate assets or the Trust’s

assets or a combination of both. To the extent that any payments came from Vernon’s separate

assets, these would fall under the power of attorney and be limited to the exclusions stated therein.

To the extent that any payments came from the Trust’s assets, these would fall under Article Four,

Sections D and G and the additional restrictions under Michigan law. The probate court must

address these factual issues on remand as well.

D. THE NOTE

Respondent challenges the probate court’s determination that the Note was not discharged.

Although the probate court erred by determining that the Note was a negotiable instrument, it

nonetheless correctly determined that the Note was not discharged.

As relevant here, MCL 440.3104(4) states, “A promise or order other than a check is not

an instrument if, at the time it is issued or first comes into possession of a holder, it contains a

conspicuous statement, however expressed, to the effect that the promise or order is not negotiable

or is not an instrument governed by this article.” (Emphasis added.) MCL 440.3104(2) clarifies,

“ ‘Instrument’ means a negotiable instrument.”

The Note contained express language stating that it was nonnegotiable. Therefore, the

Note failed the requirements of MCL 440.3104(4) and should not have been determined by the

probate court to be a negotiable instrument.

We agree with petitioners that whether the Note was discharged is controlled by MCL

556.1, which states:

An agreement hereafter made to change or modify, or to discharge in whole

or in part, any contract, obligation, or lease, or any mortgage or other security

interest in personal or real property, shall not be invalid because of the absence of

consideration: Provided, That the agreement changing, modifying, or discharging

such contract, obligation, lease, mortgage or security interest shall not be valid or

binding unless it shall be in writing and signed by the party against whom it is

sought to enforce the change, modification, or discharge.

MCL 566.1 requires that, in the absence of consideration, a writing must support the discharge.

There is no dispute in this case that such a writing did not exist. In the absence of a writing, there

must have been consideration to support the discharge. See MCL 566.1; Minor-Dietiker v Mary

Jane Stores of Mich, Inc, 2 Mich App 585, 590; 141 NW2d 342 (1966) (“The intention of this

statute is not to make unenforceable all oral modification agreements, but only those in which no

valid consideration is alleged. An oral modification agreement supported by new consideration

does not fall within the language of this statute.”).

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Adequate consideration requires a “bargained-for exchange.” Gen Motors Corp v Dep’t of

Treasury, 466 Mich 231, 238; 644 NW2d 734 (2002). Even assuming that Kathleen verbally

attempted to discharge the Note and instructed respondent to destroy the Note, no such

consideration existed to support the discharge. While respondent and his wife undoubtedly

received a benefit from a discharge, Kathleen received nothing in return. Thus, there was no

consideration, and the Note was not discharged.

In sum, although the probate court erred by determining that the Demand Note was a

negotiable instrument, it did not err by concluding that the Note was not discharged and was

subject to collection by the estate.9

III. CONCLUSION

The probate court correctly concluded that both the power of attorney and the Trust gave

respondent power to make limited gifts to himself and to third parties. The probate court erred,

however, by determining that respondent’s power to make distributions was limited by the gift-

giving provision of the Trust; in addition to authorizing respondent to make gifts, the Trust gave

respondent discretion to distribute the Trust’s assets for the benefit of the beneficiaries. Yet,

contrary to respondent’s argument, this discretion was not unlimited, and there remains factual

questions about whether the distributions and gifts he made under the terms of the Trust violated

Michigan law. Finally, we conclude that the probate court reached the right result concerning the

Note.

Affirmed in part, reversed in part, and remanded for further proceedings. We do not retain

jurisdiction.

/s/ Patrick M. Meter

/s/ Jane M. Beckering

/s/ Colleen A. O’Brien

9

We offer no opinion on whether the probate court correctly determined that, if the Note was a

negotiable instrument, it was not discharged under MCL 440.3604(1).

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